Trends with Benefits #4: When Will Gold Shine?

My discussion with Joe Foster, gold strategist and portfolio manager at VanEck, was timely. We recorded the first part of our discussion on March 3, 2020. During which, the Federal Reserve announced an emergency rate cut in an effort to contain the economic fallout from the still evolving coronavirus crisis. So, while my intent was to tackle ESG in gold mining we had the opportunity to revisit the basic tenets of gold as a hedge as well.

When will gold shine?

Nearly two weeks after our recorded discussion, the Fed announced another emergency interest rate cut on March 15, 2020. This time taking rates to zero and reviving a financial crisis-era program of quantitative easing. Many in the markets saw this as a wasted bullet, useless while virus infections continued to increase and still no vaccine. Markets continued to fall, including gold.

I had spoken with Joe about gold as a hedge generally, and he had a nuanced view of it. My take from our discussion is that the coronavirus has been a great unknown and all asset classes have generally sold off. In the last week, people have self-isolated, businesses have closed their doors, and everyone seems to generally be bracing for this crisis to play itself out over a period of an unknown duration. Markets don’t like this kind of uncertainty. What has become clear however, is that financial conditions prior to the virus were tenuous. Equity valuations rose to elevated levels and trillions of dollars of corporate debt ballooned, fueled by low rates. That is the kind of environment where gold can be a hedge. The end of this debt super cycle is a concern that also came up in episode #2 of our podcast with Steve Blumenthal.

Taking ESG ratings too far?

The acronym ESG stands for environmental, social and governance. Basically, it refers to a method of evaluating a company’s stewardship in areas concerning the environment, societal issues and corporate leadership. The problem is that there’s no one set standard of what goes into each of those buckets. Still, that hasn’t deterred efforts of well-meaning investors to compel companies to be good corporate citizens. Over the last few years in particular, ESG has become an important factor in fund selection.

In the case of gold mining, it may be to some, a dirty and environmentally destructive business. Blindly following ESG ratings, however, may lead to unwarranted exclusions of a useful asset. “Has the pendulum swung too far looking solely through an EGS lens?” Joe asserts gold miners are ESG. They have to be. This is a topic Joe has written about before, but it was great to hear him speak to the issues directly. See Joe’s blogs on the topic, Gold’s Misguided ESG Ratings and Unearthing ESG in the Gold Industry.

In any case, COVID-19 has got everyone’s attention right now. Perhaps it is the catalyst, the pin that pops the debt bubble. In the aftermath of which, we may see gold and gold miners yet again glimmer, perhaps even through an ESG lens.